Investing Tools for Investors Looking to Excel
10/21/02  

Trend Reversals, when properly set up, can give rise to explosive rallies of good duration. Trend reversals should be conclusive, not just brief, shallow, so-called counter trend reversals that fail. The trendline must be broken on the basis of closing price, not intraday movements. Breaks of downtrend lines, to be worth trading, should be high volume breakouts, while breakdowns below an uptrend can be low volume affairs. High volume breakdowns often indicate the selling may be climactic and finished. 

In other words, a few days of working off an oversold condition, without a supporting trendline of moving average break, and other technical confirmation will just fail and resume its central tendency. Buying into a poorly constituted perceived turnaround is called "catching a falling knive". 

What to look for when attempting to ascertain a true trend reversal. 

• A break of a major trendline.
• A break of a major moving average, where the 150 day moving average has actually reversed direction. 
• A Moving Average Convergence/ Divergence, where the price has broken above all the major moving averages, and the stock has not become seriously overbought. 
• A break should be accompanied by strong trading volume. Price follows volume. 
• A supportive chart like a double bottom or top, head & shoulders top or bottom, or a saucer top or bottom. 

A note of serious caution. If you have a combination of the favorable factors above, you must avoid the following problems. 

• Buying in with immediate overhead supply or resistance.

• Buying in with overhead and an overbought condition, where immediate buying power is spent. 

• Buying into a situation which is propelled by chat room rumors and rampant speculation. 

Here's a look at some illustrative charts. 

AXA, over several years, demonstrates the patterns and breaks of moving averages and trendlines. The short also illustrates the swing rule, which is a simple but helpful guide to price action. 

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